LunaticTrader

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Posts Tagged ‘1920s’

Is this it?

Posted by Danny on February 15, 2017

For years I have been updating a 1920s comparison chart on this site, until mid 2015. That’s when the current bull market started falling behind compared to the 1920s, as reported in this post. I want to revisit this chart today and the reason will be clear from this updated chart:

dow2010vs1920_upd9

The current bull market has reached the point where it is just as long as the great 1920s advance. And the market is at new all time highs. The recent run-up has not been nearly as spectacular as the final push in 1928-29, but the price pattern still shows a nice similarity over this entire period.
Of course, there is no law that says that bull markets have to be equally long. But I zoomed in a bit more closely and compared the recent price action to the final year before the 1929 peak. This is what I got:

1929vs2017

Daily price action doesn’t get much more similar than this, especially in the final 7 months. A six month sideways phase gave way to a final rally that lasted a little over three months. Even the smaller six weeks sideways before the final three weeks upward thrust to the top gets repeated. If this is not a mere coincidence then we are now within days of a major top.
The gains are smaller (which is not abnormal in a bull market that “only” triples from its starting lows), but the price pattern is almost a photocopy.

What could go wrong? Well, it’s never good to get married to a price pattern. There is also another possibility to consider here. In the 1920s the final runaway mania stage didn’t start until the Fed had really started hiking interest rates several times in a row. Bonds are not a place to be when rates are going up (which pushes bond prices down), so more investors started getting into stocks (which happened to be going up every day, making them hard to resist).
This time the Fed has waited longer to hike rates, so the final runaway stage may just be getting started now. We will know if the market keeps going up in March and April. In the 1920s an acceleration came once the market had more than tripled from its lows and we are now very close to triple again. This could be a sudden “phase change” just like water starts cooking at a certain temperature. Vapor behaves differently from liquid water, and just so a market that goes into blow-off mode behaves very differently. Buying begets more buying and people who stayed in bonds start feeling stupid compared to their friends who are driving nice new cars they bought on the back of their stocks market gains. It starts feeding onto itself.
Sure, some people will keep warning about overvaluations. But investors won’t listen. Why not? Because it is well known that most investors suffer from “superiority bias“. Just like almost 90% of drivers think they have above average driving skills, investors typically believe they have above average investing skills. If you happen to think that your investing skill is below average then you will probably keep your money in a savings account, or hand it over to a money manager (who is usually having even more superiority bias than a retail investor). The result is that participants in the stock market are almost invariably believing that they will be able to get out before stocks go down.
This may happen again and we are probably close to the point where this phase change can start.

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What happened with Dow 32000?

Posted by Danny on November 23, 2015

Today we revisit the Dow 32000 scenario that I have updated from time to time since the summer of 2013. The Dow has not kept up with the 1920s in recent months, but the Fed has also not started raising rates yet. What will happen when they do? More on that below, first we take our look at the S&P 500 (click image to enlarge it):

S&P 500

The market is climbing again. The Earl and MoM indicators are going up, but the slower Earl2 (orange Line) is still high and going down. This suggests that the market needs more time to digest the October rally. I am looking for the S&P to stay sideways in the 2000-2100 range for several more weeks.

The last time we looked at the Dow vs 1920s chart was back in May. I have updated the chart and here is what we have now (click image to enlarge it):

dow2010vs1920_upd8

The Dow needed to climb to 20000+ to catch up with the 1920s trajectory. That clearly hasn’t happened. Of course that doesn’t mean we will not get any blow off rally to end the bull market that started in 2009. In the 1920s the final parabolic move didn’t start until the Fed started raising interest rates. Sooner or later we are going to find out if that repeats itself this time.

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Breakout imminent

Posted by Danny on May 4, 2015

Stocks weakened last week, but the Nasdaq remains in the rising wedge pattern that started last year. It is still not clear which way the eventual breakout move will go. Here is the current Nasdaq chart (click image to enlarge it):

Nasdaq

Thursday’s drop threatened a breakout to the downside, but Friday’s recovery shows the Nasdaq might try to hang on. We remain in a lunar red period until later this week, and my technical indicators are pointing down with bearish divergences in place. This means the Nasdaq remains at risk of a sudden sharp drop as long as this pattern is not resolved.
This is still not an attractive entry point for investors who are looking to go long. So, I would wait until the sky clears.

The LT wave for April did a good job, indicating the main swings of the month pretty well. Here is the LT wave for May (click image to enlarge it):

LT wave May 2015

The wave projects weakness in the first half of the month followed by a stronger period. The lowest values come on May 6-8 and on May 15. The highest value of the month is on May 21, with smaller peaks on May 3, May 11 and May29-30.
As always, use this LT wave with the necessary care as it is an experimental method.

I have also updated our Dow 32000 scenario, comparing the current market to the great bull run of the 1920s (click image to enlarge it):

Dow vs 1920s

For the first time in more than a year we see the market deviate a bit from the pattern it followed in the 1920s. This had to happen sooner or later. As I pointed out in the most recent review of this scenario, the Dow needed to climb to 20000 this spring to stay on track, and that has clearly not happened. Of course, the Dow could catch up by reaching the 20000 level this summer, and then it would be back in line with the 1920s. But that remains to be seen of course.
Interestingly we are ending the period that was marked by mild recession in the 1920s scenario and closing in on the point where the Fed started raising interest rates. That sparked the final mania stage in 1928-29. Are we setting up for a repeat? Most investors are probably not prepared for anything like that, so it could be interesting.

Good luck,
Danny

Posted in Financial Astrology, Market Commentary | Tagged: , , | 6 Comments »

Why is the stock market so depressed?

Posted by Danny on January 5, 2015

Why is the market so depressed? That may sound like a funny question, because more than a few observers want us to believe that stock investors are becoming euphoric after 5 years of ongoing bull market. But is that so? Where are the signs of retail investors becoming euphoric? Or is it conjecture based on the fact that stock markets are at record highs once again, and hence investors are “supposed” be euphoric right now?

I couldn’t escape seeing some of the S&P 500 forecasts for 2015 and was surprised at how subdued they are. Market strategists at Goldman Sachs, Barclays and Credit Suisse are expecting S&P to end the year at 2100. Deutsche bank calls for 2150. Citibank and BoA are more “optimistic” calling for S&P 2200 by the end of 2015. But hey, the S&P 500 was already close to 2100 in the final week of 2014. So, all these major banks are basically calling for stocks to be mostly sideways and barely end the year in the green. It is very rare for these major banks to call for a down year in stocks, so when they predict a flat year it is about as pessimistic as they ever get.

How about retail investors? On social networks I still see a good deal of disbelief, cynicism and even sarcasm about the ongoing bull market. But maybe that’s just my own biased judgment, so I always try to look for more objective methods to gauge investor sentiment. Classic investor sentiment surveys are unreliable for reasons I explored here. I like to play with google search trends and was intrigued by this finding (click image to enlarge):

zerohedge
(Source: http://tinyurl.com/ke5h8t9)

If the average investor is becoming euphoric, then why is an overly bearish site like Zerohedge attracting more and more readers, to the point where it is almost overtaking Marketwatch? If the average investors is becoming euphoric, then why is Seeking Alpha, a site with a generally bullish slant, seeing a accelerating decline in interest? It’s hard to envision how more and more overoptimistic and overextended bullish investors would suddenly want to read the apocalyptic perma-bearish stuff that zerohedge cranks out on a daily basis. Notice how zerohedge previously had peaks of interest in November 2011 and June 2012, right when stocks were at important correction lows just before embarking on major rallies.

And then I also noticed articles like this: 11 Economic Disaster Predictions From Experts Around The World For 2015. It looks like you have plenty of company if you are pessimistic for 2015.

Bottom line: the current google trend readings are more consistent with a pessimistic/depressed mood in the market, and so are the bank’s subdued forecasts for 2015, and fear/depression views still sell like hot pancakes.. Hence the title of this blog post: why is the stock market so depressed?
Possible answer: because the media has drilled us with the consensus view that end of QE and the Fed raising interest rates in 2015 will knock down the stock market.
Maybe so, but then we better also ponder: when was the last time that a consensus bandwagon offered an easy ride to investment profits?

To end today’s post I have some updated charts. Here is the current setup in S&P 500 (click image to enlarge):

S&P500

The market is starting the new year with a pullback. Moves on the first and last days of a year are generally rather meaningless. This pullback is probably testament to a bearish mood, with some investors having waited to take profits for tax reasons. We remain in a lunar red period until later this week and technically my Earl indicator is pulling back with the slower Earl2 being on neutral. We could easily retest the 2000 level and if the S&P drops even lower then more bearish scenarios will come into play. Until then this is just a slow start to the year.

Here is the LT wave chart for January (click image to enlarge):

LT wave

The LT wave did very well in December. The overall moves matched the expected pattern quite closely. For January the projected pattern calls for weakness until the 9th followed by a stronger period until the 23rd. This stronger period has a quick dip in the middle, around 16th-17th. The 17th is Saturday, so it may carry over into a weak opening on Monday 19th, from which market “should” recover. Last week of January is again weaker, but not overly negative.

I have also updated my Dow versus 1920s comparison chart (click image to enlarge):

DowVs1920s

The Dow 32000 scenario continues to stay in the race. Since my most recent update the correlation with the 1920s has increased even further. If the scenario is to remain on track, a big “IF”, then the Dow should now climb above 20000 and then sputter for the rest of the year. The Fed would then raise rates in an attempt to stop a developing stock mania, and if that works as well as it did in the 1920s then it will have the opposite effect and push stocks up into a final blow-off peak. Instead of putting the blame with their own failed policies, they will conveniently point to algos and speculators as the causes of the mania and crash. But, that’s premature. Let’s first see if, when and how the market deviates from this scenario. It is going to be interesting no matter how it pans out.

Good luck,
Danny

Posted in Financial Astrology, Market Commentary | Tagged: , , | 5 Comments »

Dow 32000 remains on track

Posted by Danny on November 3, 2014

Markets continued to surge last week, racing right back to new record highs for some indexes. With the month of October behind us I am updating my Dow 32000 scenario, which just refuses to go away, and we will also look at potential causes for a final mania. But first we take our weekly look at the Nasdaq (click on chart to enlarge):

Nasdaq

The current market situation is quite similar to last February, when the market recovered equally quickly from a sell-off. The current rate of change cannot be sustained for very long, and overhead resistance is now looming near 4650 and 4700. Technically my Earl indicator is just turning down and the MoM is reaching very overbought +8 territory. But just like in February the slower Earl2 still has a lot of room to rise. The market may hold up near current levels for a while, or it may start another leg down like it did in March-April, there is no way to tell at this point.
I don’t think we will get an exact repeat of March-April. I would rather look for a quick drop to ~4500 and then another rally attempt.
The LT wave chart for November looks like this (click chart to enlarge):

LT wave

The LT wave was not perfect in October (it never is), but it signaled some downturns and correctly showed the strength in the second half of the month. For November it shows renewed weakness in the first two weeks, followed by a stronger period with a peak value around the 20th-22nd.

***

I have also updated the Dow comparison with 1920s for October (click chart to enlarge):

Dow vs 1920s

Despite ebola and geopolitical tensions around the world the Dow just keeps mimicking what it did in the roaring 1920s. Amazing? Well, the roaring 20s came on the heals of a deflationary shock that saw the stock markets drop some 50% in two years. The 1920s had historically weak GDP growth per capita. And the 20s had an overactive Fed which kept interest rates very low for a long time. And of course, investors remained very skeptical about the rising equity markets. In other words, pretty much the same as what are having since 2009.
We have now come to the point where the stock market took off again. For the scenario to stay on track the Dow will have to climb to ~20000 by next spring. If the Fed sticks to the 1920s playbook then it will start raising rates in summer 2015 and that will cause the stocks to make a blow-off top over the next 12 to 18 months. Of course, that would be in a perfect universe…
But why would stocks make such a moonshot when interest rates start to go up? Well, that’s why. Who wants to hold long term bonds when interest rates are set to go up? Long term bond prices are artificially inflated by the Fed’s QE programs, which were designed to push long term rates down. What happens when that manipulation stops? Right, the price of bonds will probably go back to a more “normal” level. What could that level be for long term treasuries? Here is a weekly chart (click to enlarge):

Bonds weekly

Before and after QE1 (Nov 2008 – Jun 2010) the long term bonds (ZB) hovered between 115 and 120 (pink oval in the chart), which means a long term rate of about 4.5%. Subsequent QE programs have pushed ZB up above 140, which means a current  very low long term rate of 3%. I think ZB could easily fall back to the 115-120 area without the support of further QE programs. Long term bond holders then face a 20% loss. Once this starts happening investors will realize that it is better to be in cash or stocks until bond yields are more attractive again. We already got a taste of it three times since 2009: every time bonds have declined stocks have been doing very well:
*Jan2009 – Apr2010: bonds down 15% -> nasdaq up 56%
*Sep2010 – Apr2011: bonds down 12% -> nasdaq up 34%
*Jul2012 – Dec2013: bonds down 18% -> nasdaq up 42%

My long term chart now suggests that bonds have peaked out once again. There is a broad bearish divergence in my Earl indicator and the Earl2 has turned down recently. If bonds ZB drop back to 115-120 in 2015-16, then where will stocks be? Higher? Much higher? Dow 32000, after all?
The big risk with QE was probably never that stocks would crash when the program ends. The risk has always been that stocks could surge when QE ends, thus forcing the Fed to raise rates to reign in a runaway equity market. But raising rates could drive even more money out of bonds and into rising stocks, further destabilizing the situation and feeding into a speculative stock mania. The bond market is nearly twice as big as the stock market, so when money starts fleeing bonds it can have an outsized effect on stocks. That’s what we got in the 1920s and that’s what we now risk getting again. QE is a stingray, dear readers, all the poison is in the tail end.

Good luck,
Danny

 

Posted in Financial Astrology, Market Commentary | Tagged: , , , | 3 Comments »

Outlook for September

Posted by Danny on September 1, 2014

Stock markets have reached new highs last week. The S&P 500 has climbed above 2000 for the first time and now sits right at our Top target at 2004. Further gains appear likely, but September and October are two months with a rather bad reputation and that may prompt investors to take some profits.

Let’s have a look at the current S&P chart (click for larger image):

S&P 500

The recent price action is very similar to what we got at the start of 2014. After a sell-off the market has swiftly climbed to new highs. Based on the trend channel a further climb to 2050 is feasible. But we have just entered a lunar red period and the Earl and MoM indicators appear to have turned down already. So, I think the market will first try to digest the recent gains.

A similar outlook is seen in the LT wave for September (click for larger image):

LT wave

The wave did fairly well in August, marking the low early in the month and then climbing into a high on the 29th. Expected weakness in the middle of the month did not materialize.
For September the LT wave projects a period of weakness until the 20th, and a high on the 25th or 26th.

I have also updated the 1920s comparison chart (click for larger image):

dow_vs_1920s

The Dow Jones Industrials continues to mimic the price action of the 1920s very closely. We are now approaching the point where the market took off after almost a year of sideways consolidation. So, it will be interesting to see what happens.

Stay tuned,
Danny

 

Posted in Market Commentary | Tagged: , , | 3 Comments »

Is the breakout for real?

Posted by Danny on June 9, 2014

Stocks have pushed to new highs in rather convincing fashion. Is this a real breakout, or a just blow-off top?
Here is the current chart for the S&P 500 (click for larger image):

S&P 500

Our lunar red period has not stopped the recent rally and the S&P 500 chart is showing a clear breakout from the recent sideways pattern. This kind of breakouts is usually tested, so I think the market will drop back to 1920, where resistance should have turned into support, before possibly heading higher in the next lunar green period. Meanwhile my technical indicators have dissolved the bearish divergences that plagued the market since the start of the year, and there is now further room to rise based on the long term up trend channel. A drop below 1850 would tell us that this is a false breakout.
We cannot rule out a peak at this point, but on blogs and social networks I don’t see the kind euphoria that normally comes with major tops. Rather on the contrary, I see massive disbelief, cynicism and even anger about this stock market’s continued climb. Everybody seems to be trying to go short at the top. Comparisons with 1929 or 1987 have been getting extensive coverage in financial news media, implying that we are about to crash. Few and far between are the calls for a continued bull market.

It is one of the great benefits of writing a financial blog or newsletter that the responses (or absence of them) often provides good clues where the market is actually going. For the last couple of years, whenever my analysis or chart points to an impending decline in stocks, it gets comments and likes on twitter. But whenever I post a bullish scenario it just harvests silence. And for gold it has been just the reverse. So, I have gradually learned to doubt my forecast if too many readers agree with it. The scenario that nobody believes is not rarely the one that pans out.

For example, almost nobody is considering the possibility that we are in a repeat of the 1920s, a scenario I have been watching since last year. Since our latest update the odds for this scenario have continued to go up. Here is the updated chart (click for larger image):

Dow vs 1920s

The correlation between “Dow Aug 1921 – Nov 1926” and “Dow Feb 2009 – May 2014” has now climbed to a whopping 90.4%, up from 81% when I first posted this chart. The case has become even more compelling with the news that Q1 US GDP was negative. A mild recession in 1927 also forced the Fed to delay their unwinding of ultra-low rates. When they finally started raising rates in 1928 it caused the stock market to double within 18 months, and then a collapse into the great depression. The Fed is quietly setting us up for a similar disaster, simply repeating their mistakes from the 1920s.
One of the conditions to keep this scenario on the table was that the Dow needs to break out above 17000 this year. We are now very close to that point. I still think the market will deviate from the 1920s at some point. But the question is: when? Keeping up with the roaring twenties would give us Dow 20000 by early 2015, with the market spinning out of control after that. If so, I would expect to start getting comments and likes for bullish posts, while harvesting silence for bearish scenarios. That’s how we will eventually know when we are close to the top.

Good luck,

Danny

 

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Can we avoid Dow 32000?

Posted by Danny on March 10, 2014

Stocks reached new record highs last week, right at the end of our lunar green period. That marks the first solid green period in quite a while and suggests that normal lunar cycles are coming back. I think we will see a pullback in the current red period, but probably not as deep as many traders expect.
Let’s have a look at the S&P 500 (click for larger image):

S&P 500

Last week’s high could mark an important top for the market. It depends how much of a downturn we see in the next week or two. If the pullback is mild then a push above 1900 is in the cards for the end of March. My technical indicators give a mixed message with the Earl2 showing no signs of peaking out yet. So there is further room to rise, but I think the overhead resistance levels around 1900 and 1940 will prove to be a tough barrier. April is likely to become interesting as it will be a month with eclipses. More on that in next week’s post

***

With the month of February behind us I have updated the comparison chart with the 1920s. When I first posted this chart in June last year it looked like a very remote scenario. But the case for Dow 32000 has held up unexpectedly well. One of the main conditions to keep this scenario viable was for corrections to be very shallow. That has been the case in 2013. Now it remains to be seen if the Dow Industrials can push above 17000 later this year. That’s the second condition for this scenario to remain on the table.

Here is the updated comparison chart (click for larger image):

comparison with 1920s

The correlation remains very high, and already started well before the bottom of the bear market. This correlation in itself is nothing remarkable, as it is always possible to find stretches of market action that look very similar. But what we have here is that the market circumstances were also very similar to the current ones. I have marked the major phases in the chart (1 to 4).
The 1920s started with a deflationary depression which was followed by a long period of ultra low interest rates with the Fed expanding its balance sheet. We have been going through the same playbook and have now arrived at the point that corresponds to August 1926. At that point the stock market started sputtering and in 1927 the US experienced a mild recession. In 1928 the Fed finally started raising rates. Instead of pushing the stock market down this marked the start of the blow-off phase with stocks almost doubling in the next 18 months. So much for “don’t fight the Fed”.

Could this happen again? I would rather ask: can it be avoided? If we continue along the same trail, then look for the economy to sputter in 2014 and that will keep interest rates near zero for the rest of the year. In 2015 the Fed will start tightening and that will cause stocks to break out to the upside. Why to the upside? Bonds inevitably go down when interest rates go up. This causes some money to flow out of bonds and into stocks (which look “safe” again in the eye of retail investors) and is a process that can start feeding on itself uncontrollably. At that point a disaster is inevitable.
In trying to avoid another great depression the Fed will then have managed to set the stage for one.

What would it take to write down this scenario? If the Dow drops below 14000 in 2014 then the odds would become very small.

Stay tuned,
Danny

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1920s again

Posted by Danny on January 14, 2014

A quick update of the chart I first presented last June, and in an updated version last August.

It is now updated for monthly Dow closes until December 2013 (click for larger image):

dow vs 1920s

The correlation with 1920s bull market remains very high, and has actually increased again since the August update. The correlation is now up to 0.876
Not only that, the level of the Dow Jones Industrials is almost exactly where it was at this stage in the 1920s.

If it continues this way, then the market will go through a shallow correction with a summer bottom and then recover by the end of the year before bursting higher in 2015 and 2016. At that point it will be too late for the central banks to stop the disaster.
This is the danger of “perpetual” zero interest rates: it makes bonds completely unattractive to hold for the long term, so too much money starts flowing into stocks and it becomes like a runaway train. P/E levels can easily reach 25 or 30 before everything is said and done.

What could be done to stop it?
Stop QE before the summer and raise short term interest rates to 2% or more. This will probably cause the stock market to drop to 12000 or even 10000, but that’s better than setting up for a repeat of the 1930s.

Good luck,

Danny

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